Exit and Growth Strategies for Middle Market Businesses

We have all heard Alan Lakein’s quote “Failing to plan is planning to fail.” However, the problem today is that many middle market entrepreneurs selling their businesses without proper planning for the sale event and thus leave millions on the table.

I am sure that many of these entrepreneurs would say that they did plan to sell, hired an investment banker, and went through a process. However, this is the end part of the process and planning needs to start 3+ years in advance to be truly effective. In the sub $100MM market, to maximize the value of a business is not hoping some banker knows a buyer that will pay substantially more, but rather properly preparing the company for sale.

The lack of planning I believe is due to two issues: (i) entrepreneurs don’t fully realize the benefits of planning, and (ii) they don’t look at their business with external objectivity.

Proper planning will:

• Allow your tax and wealth advisors to minimize your taxes and maximize wealth transfers;
• Enable you to implement profit improvement measures and show the effect of those to a potential buyer;
• Ensure that the company has a strategic plan that it is executing, and that the management team knows it, breathes it and lives it;
• Ensure that your customer base is diverse, and you have developed recurring revenue lines, if possible;
• Provide the opportunity to ensure that your contracts will allow for a sale and that they are relatively similar; and
• Allow you to improve the company’s performance, to ensure it is performing in the top quartile of similar businesses.

All of these steps will increase the value to a buyer and increase the net proceeds to the seller. However, they take time to develop, implement and show results. They cannot be done overnight. This is like running a marathon, you can go out and run one, but if you train and work on it, you will do much better, but that takes time. Thus, the planning needs to start well in advance.

Finally, markets operate in cycles, which may not coincide with your plans. As inconvenient as this is, you have no control over market timing and must deal with the market conditions as they occur. Therefore, if the market window closes before the sale is complete, you can either sell at a lower price or wait 6 – 8 years for market conditions to return. To minimize this risk, always run your business as though you are going sell it “tomorrow.” Doing so will allow you to take advantage of market conditions when they occur and maximize your proceeds.

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